Does a Dell Buyout Make Sense?

On the face of it, a Dell buyout makes sense: The company has been languishing for years, and the era of the PC is clearly on the wane. Consider that it took revenue of $13.7 billion for Dell to make profits of $589 million in the last quarter.

Dell’s core desktop PCs and mobile computer divisions are both shrinking in the face of demand for the iPad and Android tablets. Even worse, PC shipments are on an incredible downward trajectory. Research firm Gartner said worldwide PC shipments shrank 4.9%, while IDC reported worldwide PC shipments shrank 6.4%, in the third quarter this year when compared to the same period a year earlier.

Only Dell’s servers and networking division is growing, but the company must fend off cloud-based computing competitors such as Amazon.com.

Perhaps now is the moment to buy out the current shareholders, strip the company of costs and run Dell for cash.

A deal would be somewhat easier to complete given Michael Dell’s 15.7% ownership in the company.

But:

This is still a massive acquisition, one of a scale that we’ve not seen in the past five years.

Let’s assume that a deal would take a standard 20% takeover premium, which would push the overall equity price to roughly $ 22.8 billion from the pre-rumor stock price.

Take out 15% of that equity and buyers would still have to come up with $19.4 billion.

Let’s assume a conservative 35% would be in additional equity investments and the remainder in debt financing.

That would mean equity of some $6.8 billion from the world’s largest private-equity firms. And another $13.5 billion in debt financing from the world’s largest banks. One positive: This debt financing would probably come pretty cheaply given investors’ appetite for high-yield debt. And there’s some $5 billion in cash already on the books – though not all of that could be dumped into the deal, considering the costs of breaking up the company, paying PE fees, and the need to actually keep building new products and services.

But make no mistake: These are huge numbers in the post-buyout era. Ones that were touched only with the most stable of companies back in 2006 and 2007 – think Hilton Hotels, for instance.

What buyers would be willing to stump up this kind of financing for a business in such steep and unpredictable decline? How might the personnel at a business under the private-equity knife respond to the thought of a new owner? How would bank lending committees sell this kind of underwriting to their Dodd-Frank-enabled top executives?

So, yes it make sense for all the parties to explore this kind of deal. But until Dell stabilizes its revenue, private equity firms gets comfortable writing bigger checks, and banks suddenly feel happy about huge buyouts, probably best to place this in the Right Idea, Wrong Moment folder.